Seeking growth offshore

As the Australian online classified market matures and competitive challenges arise, Seek looks to Asia and Latin America.

Summary: After years of double-digit growth, Seek is attempting to establish a beach-head in the less developed Latin American and Asian online classifieds market. The growth potential is huge, but the market has concerns about the twin threats to Seek’s revenues from declining employment and potential competition.

Key take-out: Rising unemployment and the appearance of competitors are among Seek’s biggest challenges.

Key beneficiaries: General investors.Category:Shares.

Recommendation:Outperform. (Seek)

One of the businesses we have owned for some time is Seek Limited – Australia’s leading online employment site. Some of the reasons for our attraction to Seek include its dominant position in the Australian online classified jobs advertising market, and its exposure to leading market positions in a number of Latin American and Asian markets.

The Australian business has fueled double-digit EPS growth for Seek for a number of years and, while approaching maturity, appears set to continue to produce strong cash flows. The Latin American and Asian businesses are at an earlier stage of their development, with internet penetration and the migration to online advertising not as advanced as it is in Australia. For these businesses, the future is hard to predict. However, what is clear is that through them Seek gains exposure to a large slice of the world’s population, and countries with strong GDP growth potential. The reward for success in these markets could be very substantial.

One issue for Seek is its exposure to the overall volume of job advertising, which is tied to the economic cycle. Declining employment levels typically mean fewer job advertisements, and Seek’s earnings in the short-term are therefore threatened by a weakening domestic economy and declining confidence levels.

It is important to note, however, that this is not a permanent hit to Seek’s prospects. If Australia’s long-term economic outlook remains sound, then Seek’s earnings will recover from any cyclical downturn. For a long-term investor, it is entirely reasonable to look through these short-term issues, particularly if divestment would trigger a CGT liability.

Some stockbrokers will tend to focus more attention on these short-term issues, but that is the nature of the stockbroking business, where revenues are driven by the level of stock turnover.

Of greater concern is the long-term sustainability of Seek’s competitive position. Attractive business economics are a magnet for competition, and in Seek’s case there is no shortage of challengers who would hope to secure part of the lucrative online job advertising market. In gauging long-term prospects, investors need to arrive at a view on Seek’s ability to prevail in the face of these challenges.

One of the most credible threats comes from LinkedIn, which ranks at the 14th most popular website globally in terms of traffic volumes (according to the web information company, Alexa), and number 10 in Australia. LinkedIn is also enjoying exponential growth in user numbers: after taking eight years to acquire its first 100 million users, LinkedIn needed just a year and a half to acquire the second 100 million – a milestone it reached earlier this year.

Seek, while enjoying strong traffic volumes in Australia, is some way behind at number 27.

Given the work orientation of LinkedIn, it’s certainly reasonable to consider whether it may be able to convert its traffic volume to job advertising revenue at the expense of specialists like Seek. Also, LinkedIn’s market capitalisation of over $20 billion demands that it generates revenue and earnings from somewhere, and broker forecasts contemplate that earnings will increase rapidly in years to come. However, knowing just where that revenue will be derived, and at what rate, is very difficult.

Recent commentary from LinkedIn in relation to its Talent Solutions business (previously called “Hiring Solutions”) sheds some light on what has happened so far. In a June presentation, CEO Jeff Weiner’s comments on the development of LinkedIn included the following: “…interestingly enough, … only a small minority of the total ways in which people engage with the site was related to job seeking.”

Describing the position of the Talent Solutions’ business (previously called the “Hiring Solutions” business) more specifically, Weiner said it was “very early days”. This gels with the experience to date in Australia, which indicates that LinkedIn has not been able to make significant inroads into Seek’s market.

While the future is very hard to predict, the evidence so far is more straightforward. It indicates that high traffic volumes for LinkedIn may not be sufficient to allow it to take market share from an established and focused specialist like Seek.

This competitive dynamic will need to be monitored over time for any changes. However, as it stands, a pull-back in the Seek share price on the basis of weakened short-term confidence may just present an opportunity for those with a longer-term view.

Roger Montgomery is the founder of The Montgomery Fund. To invest, visit www.montinvest.com

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